How High Discounting is Hurting Your Tech Business

October 21, 2015

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Technology is one of the most quickly evolving and dynamic industries in the world – driven by almost constant discovery and innovation in regards to buyer behavior trends and products or services. In order to stay at pace in this fast-moving environment, IT marketers and brands must be able to create a marketing strategy that is as effective as possible. After all, in 2014 alone, the tech landscape doubled in vendor size, and it has continued to grow.

The technology industry has helped to set the pace for pioneering change, B2B marketing concepts, and new initiatives for commerce. For instance, technology companies have provided businesses with new ways of accepting payment, new methods for marketing, and even ways of encouraging user-interaction with brands both in, and out of the store. Yet, in spite of this, the sheer level of competition in the industry has led to rampant discounting across tech companies. Although some resources suggest that discounting can be necessary in certain circumstances, many tech businesses discount without considering the impact of their actions.

Discounting products and services sets a bad precedent for customers and clients, and displays your brand as one that lacks confidence in its own ability. So how exactly does discounting damage your B2B tech business?

It Leads To Lower Perceived Value

Although discounts can be useful in very particular situations, discounting without proper consideration of the outcomes can have huge risks – one being that it creates a negative long-term perception of the value of a product. Providing discounts as a B2B company is very similar to offering discounts as a B2C company. You find that you’re having trouble boosting your sales and decide to wind down the price in the hope that lower costs will promote faster customer conversion. Often, this tactic can lead to a temporary spike in sales for the short-term, causing businesses to believe that they’ve made the right choice. Studies by the Technology Services Industry Association, working with Value and Pricing Partners, have found that high discounts have little impact on close rates, and often correlate with lower profitability for the company involved.

Even if there are short term benefits, many businesses fail to recognize the damage that they’ve caused to their brand in the long term.

Customers and clients—whether they’re businesses themselves, or individual consumers—give companies their hard-earned cash only when they feel they are receiving something that either meets, or exceeds their concept of perceived value. It doesn’t matter whether you’re selling POS systems, invoicing software, or hotdogs – customers want to believe they’re getting significant quality for their money. Because of this, pricing plays a serious role in the purchasing process – by anchoring that concept of perceived value. Studies have shown that in most cases, people will ascribe more value to a product or service that costs more. In other words, the lower your price, the lower the value of your product perceived by your customers.

Setting a Precedent for Disinterest

The moment that you decide to offer clients a discount on your products or services, you’re showing them that the value you’ve ascribed to what you’re offering can be changed or altered without any negative impact to them. In other words, you’re showing that you’re not completely confident in what you’re selling. At the same time, you’re training your customers to expect recurring discounts in the future, and setting a precedent for lower costs. This means that if they’re not particularly keen to buy your product in the first place, they’ll wait around until you have to drop the prices before converting.

Many companies defer to discounting methods because they feel as though they haven’t got another option – but this isn’t the case. Even handing out product samples for no cost won’t increase your revenue if your chosen market isn’t interested in buying. The aim should be to deliver a solution for an immediate and pressing problem that your audience has, not to offer them the lowest price for something they aren’t sure they need. Discounting practices don’t create urgency in customers – rather, it’s more likely to make them less interested in buying your product.

Though it may seem initially beneficial, poor discounting practices can train buyers to expect upcoming markdowns – a lesson that huge retailers have learned in the past. Rampant discounting makes offers less relevant, and could cause your brand to blend into the background.

Opening Yourself Up to Demolished Profits

Running a successful business in today’s economy is a difficult feat. In the B2B technology industry – where competition is increasing, it’s crucial for companies to hold onto as much profit as possible if they want to stay afloat, and this means developing a successful pricing strategy. If you rely on discounting to draw in customers, then you’re cutting your profits, meaning that if you discount by 50%, you’ll need to sell twice as much just to earn the same amount. Do you have the manpower or time to come anywhere close to that goal?

At the same time, you’re opening yourself up to potential problems with competitors in your industry, as when one company discounts their prices, others may feel as though they’re forced to follow suit to remain competitive. A war of ever-decreasing prices isn’t sustainable, and you may find that you’ve ruined your brand reputation and still ended up with no sales.

Focus On Other Solutions

If your customer doesn’t respect the value you offer, then they may not be the right target market for you. Your aim should be to underline the benefits that your customer can get from your service or product, and show that you believe in your own value. Prove that you have confidence in your business, and learn how to sell to the target audience most susceptible to conversion.

The Real Tragedy

Companies often justify discounting by attributing it to competitive pressure. In working with dozens of companies over as many years, our research has found that easily 75% of reported customer price sensitivity is caused by the discounting behavior of the companies themselves. In most cases, the competition has little to do with it. In one company, average discounts varied from 10% to over 50% across sales territories. At that firm, the territory with the lowest discounting generated the most sales and revenues. Sell value and limit discounting. That’s the path to more profitable growth.

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Timothy Matanovich is president of Value and Pricing Partners, and author of Profitable Technology Services Pricing - How to use offering design and pricing strategy to accelerate sales and increase willingness to pay, available on Amazon. Tim’s clients include Salesforce.com, Nikon Precision, CDK Global, Kodak Alaris and Informatica.